Final Retirement Security Rule Published

The Department of Labor Tuesday issued the final Retirement Security Rule that clarifies for plan sponsors and individuals how fiduciary obligations under ERISA apply to investment professionals dealing with retirement-related investments.

The Biden Administration and DOL’s Employee Benefits Security Administration announced that the rule will go into effect to update the definition of an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The final rule will require “trusted investment advice providers” and financial institutions working with them to ensure there are no conflicts of interest or overcharges for clients using their services.

During a media briefing, department officials said the rule and related prohibited transaction exemptions will be active on September 23 in terms of the obligation for investment advisers to follow impartial conduct standards and acknowledge their fiduciary status. Meanwhile, many of the other exemptions and reporting needs will not kick in until September 2025. Officials also noted that the full rule is available on the DOL’s website Tuesday, on public display on the Federal Register on Wednesday and published to the register officially on Thursday.

The initial proposal, issued in October 2023, has endured financial industry and Congressional backlash, threats of litigation, and over 20,000 public comments and petitions to land in the Federal Register as the law of the land. The final rule contains most of the key elements of the proposal, including the replacement of the current five-point fiduciary test in the Employee Retirement Income Security Act of 1974 with one that applies fiduciary status to rollovers to individual retirement accounts, annuity sales and qualified plan investment menu design.

Some Changes, Clarifications

One difference in the final rule that department officials noted, however, was dropping the first part of a three-part test for the definition of what it means to be a fiduciary. The omitted part had focused on whether an investment adviser had discretion over assets; the second focused on the context of the relationship and communications with an investor; and the third addressed whether an adviser had proclaimed fiduciary status.

EBSA officials said they dropped the first prong as the second and third prongs already address the “trust and confidence” question regarding investment advice. The department also made “minor changes” to those prongs to make the definition of fiduciary advice clear to address industry questions.

“One of the questions we got during the hearings, meetings we had, and in the public comments was that people wanted to make sure that the conflict test was objective; we’ve clarified that,” said Ali Khawar, the principal deputy assistant secretary for EBSA. “People wanted to make absolutely clear that things like HR professionals providing education to employees were not covered [by the rule] …. those I would characterize less as changes and more double-confirming the way that we intended the proposal to be read.”

The rule, according to officials, still includes an update to PTE 84-24, which allows insurance agents to receive a commission for the sale of annuities to retirement investors. It also brings requirements from PTE 2020-02 into 84-24, holding insurance agents to the same standards of care when making annuity sales that governs fiduciary advisers.

Khawar did note that the department made some changes to these exemptions, including on 2020-02 eliminating some of the final disclosure provisions to “harmonizing” the rule with the Security and Exchange Commission’s Regulation Best Interest standards so as not to be duplicative. That said, EBSA kept the fiduciary acknowledgement originally made in the proposal, with some changes to the timing, he said.

In addition, in regard to the exemptions, EBSA broadened the availability of the exemptions regardless of the products that are being sold. Overall, the “core standards are still there, but we made sure to broaden it to accommodate some of the comments we got,” Khawar said.

Level Playing Field

Lisa Gomez, the assistant secretary of EBSA, said during a press briefing that the rule seeks to ensure a level playing field for investment advisers by keeping everyone at the same fiduciary standard no matter their product offering or area.

“The rule addresses the unfairness of advice providers being held to different standards depending on which type of investment product they recommend,” she said. “It shouldn’t matter if the recommendation is to an individual plan participants or to a small business owner looking for advice on what to include on a 401(k) plan’s menu.”

She also noted that the current definition of investment advice fiduciary was adopted when IRAs were less common, 401(k)s didn’t exist and many people had company-managed pension plans with professional advisement.

“The definition of an investment advice fiduciary has not kept up with this changed marketplace, leaving too many retirement investors at risk for imprudent or disloyal advice,” Gomez said on the media briefing. “Today, the overwhelming majority of retirement assets are held in 401(k) plans and IRAs and individual plan participants and IRA owners are required to make the difficult investment decisions that used to be made by professional money managers. These participants and IRA owners, not their employers, now shoulder the risk of loss.”

Gomez said the investment professional savers work with are often operating with conflicts of interest, and are not operating under ERISA standards even though they “hold themselves out as doing just that.”

“That’s not right,” she said. “This rule fixes the 1975 rule’s shortcomings. Under the new rule, if you hold yourself as giving individualized advice that the investor can rely upon to advance their best interest than that is what you must do.”

Critics of the rule, including many insurance firms and industry representatives, have said there is already enough regulation on investment advice from the Securities and Exchange Commission’s Regulation Best Interest rule, and advice concerning annuities is covered by state-level regulation via the National Association of Insurance Commissioners. Dissenters have also argued the rule will dissuade advisers from offering services to those who can’t pay the fees or don’t meet asset thresholds—ultimately hurting lower-income workers.

“IRI is not optimistic that DOL’s final rule will heed the substantial stakeholder input and data indicating that this rule will inflict significant harm on consumers,” Wayne Chopus, president and CEO of the Insured Retirement Institute said in a statement ahead of the final rule being published. “This regulation is the product of a severely flawed rulemaking process and defies applicable judicial precedent and the limitations on DOL’s rulemaking authority as established by Congress.”

Legal Challenges Likely

The industry will be parsing the details in coming days, and Gomez is on record saying the department expects lawsuits to be filed soon after the final rule is posted.

The DOL’s last effort to impose a fiduciary rule, during the Obama administration, was ultimately overturned by the U.S. 5th Circuit Court of Appeals. Opponents of this version of the rule have threatened similar litigation.

Tim Hauser, the deputy assistant secretary for program operations of EBSA, said at the press briefing that the current iteration is very different from the 2016 version because it does not focus on all communication from an adviser to a retail investor, but targets the specific relationship between an adviser holding themselves out as working in the best interest of a client and that client.

“At bottom, what this rule requires of people if they are giving individualized investment advice—that they are holding out as in the best interest of the customer—is that they make sure that that advice is prudent and it adheres to a standard of care, its loyal, it puts the customer first, and it doesn’t involve misleading people or overcharging,” he said. “We are absolutely confident that insurance agents and insurance companies can adhere to those basic standards just as broker/dealers recommending securities and investment advisers under the Adviser’s Act can adhere to those standards.”

Retirement Security Rule Resources:

Fact Sheet: Retirement Security Rule and Amendments to Class Prohibited Transaction Exemptions

Amendment to PTE 2020-02

Amendment to PTE 84-24

Amendment to PTEs 75-1, 77-4, 80-83, 83-1, and 86-128